A tax-exempt organization has $5,000 of UBI from advertising and $2,000 of directly connected deductions. It also has $1,000 of interest income. The specific deduction for UBI is $1,000. What is the Unrelated Business Taxable Income (UBTI)?

Answer options:

$4,000

$3,000

$2,000

$5,000

How to approach this question

UBTI = Gross UBI - Deductions - Specific Deduction ($1,000). Exclude passive income like interest.

Full Answer

C.$2,000✓ Correct

IRC §512. Gross UBI = $5,000. Less Deductions = $2,000. Less Specific Deduction = $1,000. Total UBTI = $2,000. Interest income is generally excluded from UBI.

Common mistakes

Including interest income or forgetting the specific deduction.

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